kwilde

For those interested, below are some responses from Vestas' IR team: 1. Typically, how long is the warranty period on a newly built turbine? Varies from project to project, but typically 2-5 years. What is the average length of your servicing contracts for new turbines sold? Average duration of 8 years on new service contracts What is your retention rate on servicing contracts? It was 75 percent last time we announced it, and it has at least not been decreasing since. 2. What percentage of the manufacturing for sales in a specific region is done within that region (ie. are most of the components assembled in the destination country)? The vast majority of a project will be manufactured within the same region. We of course localize production in low-cost countries, but it is part of our strategy to have a global manufacturing footprint and to be present in all the major regions. Please see our annual report for a complete overview of our manufacturing footprint. 3. How long would a typical wind turbine last before it would need to be replaced? Our turbines have a designed lifetime of 20 years, but in many cases the lifetime can be extended. Exactly when it makes economically sense to replace the turbine is at the end of the day up to the customer. 4. For what percentage of new build agreements is the company paid up-front? When selling a project, a prepayment of 5-15% of the total value is required.

Spekulatius, Regarding: Does this mean you think that to be successful in servicing wind turbines, you would need to be an OEM? Just curious, because if that were the case, that would limit a lot of competitive threats from 3rd party servicing providers. When I was looking at the elevator industry, there were some 3rd party servicing companies in China that posed a competitive threat to the OEMs despite not manufacturing elevators themselves.

I just read some market research suggesting that while there has been pricing pressure in recent quarters, the effect of a product mix shift from 2 MW units to 4 MW may be causing a market mis-judgment with Vestas. The research showed that selling a 4 MW unit as opposed to a 2 MW unit could result in a 30% reduction in Average Sale Price (on mEUR/MW basis) without impacting profitability (ie. turbines offering 60% higher output only cost 35% more to build). This analysis jives with what Vestas’ CEO, Anders Runevad, has stated a number of times during recent earnings calls. The market research estimates the underlying price decline excluding efficiency improvements and currencies effects is ~2% for FY2017. I’ve also been thinking a bit about the possible risk of low-cost Chinese competition. I’m wondering if this is as serious a threat as it sounds? From what I’ve read, although larger turbines are prominent in Europe and becoming more popular in the U.S., in the Chinese market, very few larger turbines are being sold. Based on their 2016 annual report, Goldwind doesn’t sell any turbines over 3 MW; to give some perspective, it took 5-years of technological advances for Vestas to upgrade their 3MW platform to 3.45MW. Doesn’t this mean the Chinese are quite far behind from a technology perspective? Maybe more importantly, how important is the location of your head office in this industry. While I can see how having manufacturing facilities in China is important when selling something like shoes or clothing, wouldn’t much of the wind turbine manufacturing & assembly need to be done closer to the region it is being installed in? I’m also wondering how everyone else is treating the company’s net cash position? On the surface, the Enterprise Value looks good because the net cash position results in an EV that is ~2.7 bEUR less than the market cap; however, the company holds 2.9 bEUR of customer prepayment liabilities on its balance sheet. I added back the customer prepayments to the EV when estimating the purchase price…does anyone disagree with my take? What kind EV/EBIT multiples do other people think are reasonable for the service business? What kind of EV/EBIT multiple would you put on the Power Solutions / new equipment business? Finally, management guided to 400 mEUR of FCF for 2018, anyone have any idea how they got to that number? Unless I’m missing something, based on their revenue and EBIT guidance, it sure looks like they’re sandbagging with that number.

Hi Guys, Thank you for the responses, they are much appreciated. John…I had no knowledge of the account used for hiding losses. With this being the first I’ve heard of it, and not being an accountant, I’m still trying to wrap my head around it. So, am I correct in assuming these are losses inherited / carried over from the previous management team? If so, what would have been the correct way of disclosing the losses and reporting them to the shareholders? Do you see it as a case of correct accounting, but poor disclosure / transparency? TBW…I have a similar take on the situation; ie. short-term volatility, but over the long-term, new equipment sales should grow. I also agree that growth in servicing revenues should buoy the company’s margins as they leverage their servicing infrastructure. Spekulatius…thanks for the link to the Deminor article, that helped explain the allegations. Petec…thanks for the question. My statement was assuming that “the key players act rationally in the long-run, I don't foresee how Vestas' long-term EBIT margins for new equipment can drop much below 5%.” My line of thinking was that Vestas currently has an EBIT margin advantage over its next biggest global competitors (ie. GE & Siemens) of around 4%, and that a rational management team is unlikely to sell their products that represent >85% of their sales at a loss in order to grow their service business that represents <15% of its sales. Furthermore, the following excerpt is from Siemens’ 2017 Annual Report: “Within the framework of One Siemens, we aim to achieve margins through the entire business cycle that are comparable to those of our relevant competitors. Therefore, we have defined profit margin ranges for our industrial businesses, which are based on the profit margins of the respective relevant competitors. Profit margin is defined as profit of the respective business divided by its revenue.” They then go on to outline that their target margin range for Siemens Gamesa Renewable Energy is 5 – 8 %. Finally, my thinking was deeply rooted in having studied the elevator industry, an industry that I think has a similar operating model. For example, KONE (OHEL:KNEBV) has new equipment EBIT margins of ~10%, maintenance EBIT margins of ~25%, and modernization EBIT margins of 7.5%. Otis, Schindler, and Thyssen Krupp all have lower EBIT margins than KONE, but to my knowledge, none of them sell their equipment at negative EBIT margins. Anyway, so while I can’t be 100% confident that competitors won’t sell their equipment at negative EBIT margins in order to grow the service business, I didn’t think it was the probable outcome. Which industries running a ‘razor/razorblade’ model that run losses on the initial sale do you think are most applicable? I’d like to have a look at them to see what kind of negative margins they are selling at. Kab60…do you have the source showing US forecasts projecting volumes cut in half within 4-5 years? Thanks, Kevin

There hasn't been much activity on this thread in the past few months, but I've been looking at the company for the last couple weeks, so thought I'd try to revive it. My initial take is as follows: - Electricity generation from onshore wind has crossed the threshold of being economically viable without the aid of Production Tax Credits; I have read conflicting reports on this, but my understanding is that on a levelised cost of electricity basis, it is cost competitive with other sources. I think this bodes well for long-term demand for new equipment including new installs and re-powering installs; I've seen estimates of medium-to-long-term CAGR of 3-5% which seems reasonable. - Parts & servicing has a more attractive growth profile than new equipment with CAGR estimates of 8-9% over the medium term (upcoming 7 year cycle). Servicing also offers much better margins for the companies with the servicing networks already in place who can easily scale the business. Servicing includes software upgrades that have very high ROIC's. - Offshore wind could offer very attractive growth opportunities, but I think it's highly uncertain, so I choose to view it as a free option. - The industry looks like it is very likely to continue to consolidate. Based on recent EBIT margins (Vestas ~9-13%, GE ~6-10%, Siemens Gamesa ~4-8%, Goldwind ~9-13%, Nordex ~1-5%, and Senvion ~ -4% to 0%), I think we're likely to see the true global players limited to three or four (Goldwind has been putting infrastructure in place to expand globally, but whether they'll be successful is anyone's guess). - The industry is clearly experiencing near-term pricing pressure as the auction system becomes more prevalent and competitive bidding intensifies; however, if wind is truly cost competitive vs. other forms of electricity generation, and the key players act rationally in the long-run, I don't foresee how Vestas' long-term EBIT margins for new equipment can drop much below 5%. - It appears to me that Vestas has a decent moat based on its leadership in technology and its scale advantage (fixed costs / MW, R&D spending, servicing infrastructure). - What I've read and heard about Vestas' management team is encouraging. Ambitions include maintaining market leadership, keeping the EBIT margin > 10%, achieving positive FCF each year throughout the cycle, double-digit ROIC, and keeping Net Debt / EBITDA , 1.0. Meanwhile, incentives are aligned to those ambitions and capital allocation makes a lot of sense (limiting M&A to bolt-on acquisitions, investing in organic growth through constant improvement of current technologies, and returning excess capital to shareholders via dividends and buybacks). - Although I think consolidated EBIT margins will return to around 10% in both the near-term and over the long-term, at today's price I estimate you're getting a FCF yield of ~7% (2.2% dividend yield + buyback potential of 430 mEUR). Furthermore, you should get revenue growth in the area of 4-6% per annum (blending 3-5% for new equipment and 8-9% for servicing). Finally, you can probably expect some positive multiple expansion over the medium-term (13x seems too low for a business of this quality). All told, I'm projecting a medium-term return of 12-14% per annum. If anyone has some views on the long-term risks / opportunities for the industry, I would love to hear them. I'm particularly interested in everyone's take on: - Whether they think wind energy can compete subsidy free with other forms of electricity generation over the long-term? - If and how you think the U.S. pulling out of the climate change accord will impact the industry and Vestas in particular? - Whether you think U.S. tariffs will impact Vestas? - How you see the phase-out of the Production Tax Credit affecting the industry? - Where you see margins ending up over the long-term? - Whether you're worried about a low-cost producer like Goldwind upsetting industry economics? Thanks.

Guys, Am hoping someone can help me reconcile a few items for my model. Based on managements comments from the 3Q2015 earnings call, I understood that the following: 1. 2016 estimated corporate decline rate would be ~ 30% (12,600 boe/d). 2. In 2016 they planned to spend $100MM on Drilling & Completing + $15MM on tying in new wells (almost entirely Spirit River wells). 3. The CEO backed this out as $100MM / $8k/boe/d Capital Efficiency to replace 12,500 boe/d and keep the production flat in 2016. Unfortunately, I can't see how this jives with the info in their investor presentations. 1. BXE Spirit River 5.2 Type Curve had an average IP365 of ~ 5.0 Mcfe/d or 833 boe/d. 2. Half Cycle F&D costs for Spirit River wells (again from Investor Presentation) are $4.3MM. 3. Thus $115MM CapEx should result in 26+ net wells. 4. 26 net wells should produce on average 26 x 833 boe/d = 21,000 + boe/d. Obviously adding 21,000+ boe/d far outstrips the 12,600 boe/d that they lost via the decline rates. So, what am I missing?

ni-co, Generally, I agree with what you're saying, but think maybe you're over-simplifying things on the first point. If we think it in terms of how Pabrai or Spier were looking at it...did they not do their own homework? Surely, we can agree that they did, so what specific mistakes did they (or any of us) make with this investment that we can learn from. Your second and third points are well taken, but in my opinion, these are not black and white issues and need to be taken in the context of the entire investment thesis. Cheers.

Would like to share my experience in hopes that others don't make the same mistakes. This was by far my worst performing stock pick of all time. I lost 95% on it and my position size was embarrassingly large. It was a truly sickening experience, but I decided that while it was an expensive lesson, it would make me a better investor. In my post-mortem, I recorded 15 mistakes I made. I couldn't believe it was possible to make that many mistakes on one idea (and I probably made more that I didn't identify), but here's the list: • Position sizing was way too big for the risk profile. • Put too much faith in a SuperInvestor. • Got sucked in by the story. • Ignored that it was not my typical investment type. • Didn’t focus enough on debt level / interest expense. • Ignored the poor near-term profitability, believing they'd turn it around. • Was too trusting of management. • Focused too much on upside, not enough on the downside. • Underestimated how challenging the operational problems could be (I thought surely they could engineer them out). • Underestimated how much the cumulative effects could have to the downside. • Averaged down multiple times. • Was overconfident. • Was not skeptical enough. • Didn’t consider that there were multiple ways to lose. • Didn't think enough about currency risk (my base currency is CAD).

Thanks longlake. I've been reading through their Annual and Quarterly reports, but its tough to get a read on management when they don't do conference calls. I'm encouraged that online is growing as it is as it's higher margin business, but they do appear to bleeding cash the past couple quarters. The big risks that worry me are the online competitive threat (will people still be going to malls in 10 years?) and whether the RW&Co and Reitman brands are gonna get run over by fast fashion companies like H&M. I'm less worried about Pennington's, Addition Elle and Thyme maternity because they seem to have more staying power and more loyal customer base. Another thing I did not include in my previous post is that they have 376MM in operating leases that do not appear on the B/S, which makes it look less rosy than I first thought, but I will keep digging.

Am wondering if anyone here has had a look at Reitmans or can offer any insight? I don’t normally invest in Retail, but it looks compelling: • Market Cap $245MM - $95MM Net Debt = TEV $150MM. • Adjusted TTM EBITDA = $66MM; TEV/EBITDA = 2.3. • Revenue TTM = $935MM; TEV/Revenue = 0.16. • P/B = 0.64. • Current dividend yield is 5%. • Prem Watsa is major shareholder (13% of shares outstanding); Chou Funds also has a stake. • FX headwinds (paying in USD for COGS) have hurt them this past year, but have put better hedging practices in place. • Company has been closing underperforming stores, recently cut 10% of head office staff. • Same store sales increased by 7.6% this past quarter while e-commerce sales increased 72%. • They’ve been revamping their marketing campaign including adding endorsements by the likes of PK Subban of the Montreal Canadians.

I'm looking to start a group of like-minded Value Investors who can leverage the Research and Expertise of each individual. Ideally there would be representation across many different industry backgrounds and industry "experts" could offer feedback to others investing in their respective industries. My vision for the group includes: 1. Each group member tagging and posting their notes on each company they've researched into an easily searchable system, so they can be shared with others; I just recently started using Evernote for this purpose and find it works remarkably well. When I read regulatory filings and transcripts of Earnings calls on companies I'm researching, I make thorough notes that I then tag according to their industry & category (eg. Competitive Advantage), so I can search them at a later date or use them to make investment reports or theses. Evernote has the ability to share your notebooks with others, allowing you to leverage a network effect of multiple users. 2. Have group members assigned as "Experts" in industries where they have unique / better than average insight. These so called "Experts" can then be called upon by other group members when they are researching a company that is not in their industry of expertise. If this is something you may be interested, please send me a reply or drop me a line at kevinpwilde@hotmail.com. Cheers, Kevin